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y e s f x . c o m . c y. FX Options Introduction. y e s f x . c o m . c y. Agenda. Options Exotic options The Greeks Options trading Margins Research and Analysis. y e s f x . c o m . c y. FX derivatives explained. Options.

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agenda

y e s f x . c o m . c y

Agenda
  • Options
  • Exotic options
  • The Greeks
  • Options trading
  • Margins
  • Research and Analysis
fx derivatives explained

y e s f x . c o m . c y

FX derivatives explained
  • Options

FX options - A contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time. For this right, a premium is paid to the broker, which will vary depending on a series of variables that will be covered in future slides. Currency options are one of the best ways for corporations or individuals to hedge against adverse movements in exchange rates.

the call

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The Call
  • The right to BUY the underlying instrument at a certain price on a specified future date
  • Why? You want to capitalize on an increasing trend in the spot market. The trend could be either long-term or short-term
the call5

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The Call
  • Example: You believe EURUSD will rise towards the 1.5000 level in about a month’s time. The spot rate is currently 1.4537. You buy a EURUSD Call with a one month expiry and a strike of 1.4500. The price/premium is 152 pips.
  • Upside: Unlimited, and calculated by:
    • Closing spot price – Strike price - premium = profit
    • Example: 1.5000 - 1.4500 - 152 = 348 pips
  • Downside: The premium (152 pips) which will be lost if the option is Out-of-The-Money (OTM) at expiry (as opposed to In-The-Money(ITM), or At-The-Money (ATM))
the put

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The Put
  • The right to SELL the underlying instrument at a certain price on a specified future date
  • Why? You want to capitalize on a decreasing trend in the spot market. The trend could be either long-term or short-term
the put7

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The Put
  • Example: You believe EURUSD will fall towards the 1.4000 level in about a month’s time. The spot rate is currently 1.4545. You buy a EURUSD Put with a one month expiry and a strike of 1.4500. The price/premium is 149 pips.
  • Upside: Unlimited, and calculated by:
    • Strike price – closing spot price - premium = profit
    • Ex. 1.4500 - 1.4000 - 149 = 351 pips
  • Downside: The premium (149 pips) which will be lost if the option is not ITM at expiry.
fx options continued

y e s f x . c o m . c y

FX options continued…
  • Exotic options

A type of option that differs from common American or European options in terms of the underlying asset or the calculation of how or when the investor receives a certain payoff. These options are more complex than options that trade on an exchange, and generally trade over the counter.

it s all greek to me

y e s f x . c o m . c y

It’s all Greek to me!
  • Δ (Delta) represents the rate of change between the option's price and the underlying asset's price - in other words, price sensitivity.
  • Γ (Gamma) represents the rate of change between an option portfolio's delta and the underlying asset's price - in other words, second-order time price sensitivity.
  • Θ (Theta) represents the rate of change between an option portfolio and time, or time sensitivity.
  • ϒ (Vega) represents the rate of change between an option portfolio's value and the underlying asset's volatility - in other words, sensitivity to volatility.
  • ρ (Rho) represents the rate of change between an option portfolio's value and the interest rate, or sensitivity to the interest rate.
  • Factors affecting the price of an option:
  • Changes in the price of the underlying security
  • Strike price
  • Time until expiration
  • Volatility of the underlying security
  • Interest rates
options trading via saxotrader

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Options Trading via SaxoTrader
  • Low option margin requirements
    • Depends on the volatility (Vega) and spot price movement (Delta) of the underlying asset
    • Takes hedging-effect of other spot and option positions into account (if the options have expiry on the same date!)
    • Can use investments in other products as collateral!
  • Assistance with setting up option strategies
    • Clients can chat directly with dealers through SaxoTrader
margins

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Margins
  • As with all margin-traded assets, FX has its own, inherent margin requirements relative to the currencies you are trading, however options have further considerations when calculating your margin requirement
  • Delta:
    • Delta margin = Spot exposure * FX spot margin requirement
  • Vega:
    • Vega margin = Vega * Vol of spot * Vol Factor * Notional amount

Vega calculation

margins continued

y e s f x . c o m . c y

Margins continued…
  • Example Delta:
    • If you purchase a 25 Delta EUR/USD option for 1,000,000, you will have an exposure in the spot of EUR 250,000. If you have a spot margin requirement of 2%, your Delta margin will amount to 2%*250,000 EUR = EUR 5,000 as shown in the table below.
  • Example 1 Vega:
    • A client sells a EUR/USD Call for 1 week with a notional amount of 1 million. Furthermore, assume that the Vega is 0.055 and the underlying asset has a volatility of 10%. Since the client is a seller of the option, the worst-case scenario for the client is when the volatility increases. Hence, the Vol Factor is found in the "Change up - 1 Week" expiry bucket which lists it as 100%. The Vega margin of the option is then calculated as 0.055 * 10% * 100% *1,000,000 EUR = 5500 EUR.
  • Example 2 Vega:
    • A client buys a 1 month EUR/USD Put for one million EUR with a Vega of 0.12 and a volatility of 10%. In this case, the worst-case scenario is when the volatility decreases. Therefore, the Vol Factor is to be found in the "Change down - 1 Month" expiry bucket where it is listed as 20%. Using the same equation as above we get Vega margin = 0.12 * 10% * 20% * 1,000,000 EUR = 2400 EUR.
research and analysis

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Research and Analysis

Saxo Trader II is packed with research and analysis tools

  • Our in house strategy team provide coverage of all the markets including trading ideas
  • Our ‘dealer chat’ allows you to access real live traders 24/5
  • External analysis from some of the best names in the business
  • A technical analysis tool, as well as the study types that exist within Saxo’s comprehensive charts (over 60 different studies to choose from) give you the edge you need
research and analysis continued

y e s f x . c o m . c y

Research and Analysis continued…

News:

Our live, streaming news gives you up-to-date information from four of worlds leading providers, including AFX, Dow Jones, MNI and UBS.

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FX options – Basic Directional Strategies

agenda17

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Agenda
  • Intro
  • Pay-out profile & the four base positions
  • Basic directional strategies

1) Covered Call

2) Covered Put

3) Bull Call Spread

4) Bear Put Spread

  • Conclusions
agenda18

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Agenda
  • Intro
  • Pay-out profile & the four base positions
  • Basic directional strategies

1) Covered Call

2) Covered Put

3) Bull Call Spread

4) Bear Put Spread

  • Conclusions
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The at expiry pay-out profile:

Price of the underlying at expiry

(in this example EURUSD)

Profit

Loss

1,45 1,46 1,47 1,48 1,49 1,50 1,51 1,52 1,53

Profit or loss of the

strategy at expiry

of the option(s)

slide20

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4 basic positions – “the building blocks”

Long call (bought)

Long put (bought)

Profit

Profit

Profit

Profit

Loss

Loss

Loss

Loss

Short call (sold)

Short put (sold)

slide21

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Long Spot Position

Short Spot Position

Profit

Profit

Profit

Loss

Loss

Loss

Combined position

agenda22

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Agenda
  • Intro
  • Pay-out profile & the four base positions
  • Basic directional strategies

1) Covered Call

2) Covered Put

3) Bull Call Spread

4) Bear Put Spread

  • Conclusions
agenda23

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Agenda
  • Intro
  • Pay-out profile & the four base positions
  • Basic directional strategies

1) Covered Call

2) Covered Put

3) Bull Call Spread

4) Bear Put Spread

  • Conclusions
slide24

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1. Covered Call

  • Scenario: EURUSD is trading at 1,4200 and you believe in a further increase over the next 2 weeks, but you don’t think 1,4500 will be reached
  • Actions:
  • You go long 1.000.000 in EURUSD from 1,4200 in the spot-market
  • You sell an out-of-the-money Call Option on EURUSD, with strike at 1,4500 that expires in two weeks (notional value 1.000.000 EUR)
  • You receive 95 pips (0,0095), corresponding to 9500 USD for the sale of the option
slide25

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1. Covered Call – pay-out profile:

Spot-position: Long EURUSD from 1,4200

Sell a EURUSD call with strike 1,4500

New position: a ”synthetic” short put

Lower risk

Profit

Loss

1,4500

slide26

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1. Covered Call – potential profits:

From spot position: 1.4500 -1.4200 = 300 pips

From option (the received premium) = 95 pips

Maximum potential profit = 395 pips

On a 1.000.000 EURUSD position = 39.500 USD

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1. Covered Call – conclusions:

  • Advantages of the strategy:
  • The 95 pips premium received from the sale of the option boosts the profitability of the strategy, if you get the direction right
  • The premium you received can mitigate losses if EURUSD falls
  • Downsides to the strategy:
  • You renounce the profits that you could have derived from a stronger-than-expected rally in the market
  • You have full risk to the downside on the spot position – the received
  • premium can only mitigate this, not hedge it completely
agenda28

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Agenda
  • Intro
  • Pay-out profile & the four base positions
  • Basic directional strategies

1) Covered Call

2) Covered Put

3) Bull Call Spread

4) Bear Put Spread

  • Conclusions
slide29

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2. Covered Put

  • Scenario: EURJPY is trading around 161.00 and you think the market will fall further over the next 3 weeks - but you do not think 155,00 will be reached
  • Actions:
  • You go short 1.000.000 EURJPY
  • You sell an out-of-the-money EURJPY put option for 1.000.000 EUR at a level that you think the market won’t reach: 155.00. The option expires in 3 weeks
  • You receive 72 pips, corresponding to 720.000 JPY for the sale
slide30

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2. Covered Put – pay-out profile:

Spot-position: short EURJPY from 161.00

Sell EURJPY put with strike 155.00

Higher profits than naked put – down to a bit below 155

Profit

Loss

158

161

New position:

short ”synthetic” put

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2. Covered Put – potential profits:

From spot position: 161.00 – 155.00 = 600 pips

From option (the received premium) = 72 pips

Maximum potential profit = 672 pips

On a 1.000.000 EURJPY position = 6.720.000 JPY

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2. Covered Put – conclusions:

  • Advantages of the strategy:
  • The 72 pips premium received from the sale of the OTM option
  • The fact that you sold the option without running unlimited risk on the option itself, because you also have the short spot-position
  • Disadvantages of the strategy:
  • You forego profits that you would have made in a market that
  • falls further than expected
  • You have full risk to the upside – if market goes up, you lose all the way unless you close your spot position
agenda33

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Agenda
  • Intro
  • Pay-out profile & the four base positions
  • Basic directional strategies

1) Covered Call

2) Covered Put

3) Bull Call Spread

4) Bear Put Spread

  • Conclusions
slide34

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3. Bull Call Spread

  • Scenario: GBPUSD is trading around 1,8750 and your view is bullish in the midterm. You acknowledge that the market might go against you temporarily, and wish to have limited downside risk
  • Actions:
  • You buy a call option struck at 1,8750 that expires in 1 month for 1.000.000 GBPUSD. You pay 267 pips for this option
  • You also sell another call option – with a higher strike, that you think
  • the market won’t reach, in this case 1,9200 (same expiry, same notional amount). You receive 94 pips for this option
  • You total cost to set up the strategy: 267 – 94 = 173 pips
slide35

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3. Bull Call Spread – pay-out profile:

Bought call on GBPUSD, strike 1,8750

Sold call on GBPUSD, strike 1,9200

New position: Bull Call Spread

Lower risk/cost

1,8750

Profit

Loss

1,9200

Break even point

of the strategy

Break even of the bought call

slide36

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3. Bull Call Spread – potential profits:

1) Cost to set up portfolio:

premium paid for bought call: 267 pips

premium received for sold call: 94 pips

total: 267 – 94 = 173 pips

2) Max. potential income: 1,9200-1,8750 = 450 pips

3) Max. profit: (income – cost) 450 – 173 = 277 pips

(on 1.000.000 GBPUSD = 27.700 USD)

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3. Bull Call Spread – conclusions:

  • Advantages of the strategy:
  • Lower cost than naked call because of the sold OTM call option
  • You can stay in the market if it goes against you temporarily
  • Downside to strategy:
  • There is a premium-cost to set up the strategy
  • You might miss out on profits that you could have earned
  • on a stronger-than-expected rally in the market
agenda38

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Agenda
  • Intro
  • Pay-out profile & the four base positions
  • Basic directional strategies

1) Covered Call

2) Covered Put

3) Bull Call Spread

4) Bear Put Spread

  • Conclusions
slide39

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4. Bear Put Spread

  • Scenario: you have a bearish view on USDCHF on a 1 week horizon
  • Currently, USDCHF is trading at 1,0894 and you wish to enter a short position
  • You acknowledge that the market might go against you temporarily,
  • and wish to have limited risk to the upside
  • Actions:
  • You buy a put, with strike 1,0890 (approximately at the money)
  • for 1.000.000 USD. You pay 118 pips for this option
  • You sell a put option with strike 1,0750, a level that you think the
  • market won’t reach. You receive 54 pips for this option
slide40

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4. Bear Put Spread – pay-out profile:

Bought USDCHF put with strike 1,0890 (ATM)

Sold USDCHF put with strike 1,0750 (OTM)

New position: Bear Put Spread

Lower cost/

risk

1,0890

Profit

Loss

1,0750

Break even point of the

bought put.

Break even point of

the strategy

slide41

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4. Bear Put Spread – potential profits:

1) Cost to set up portfolio:

premium paid for bought put: 118 pips

premium received for sold call: 54 pips

total: 118 – 54 = 64 pips

2) Max. potential income: 1.0890-1.0750 = 140 pips

3) Max. profit: (income – cost) 140 – 64 = 76 pips

(on 1.000.000 USDCFD = 7.600 CHF)

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4. Bear Put Spread - Conclusions

  • Advantages of the strategy:
  • Lower cost than naked put because of the sold OTM put
  • You can stay in the market if it goes against you
  • Downsides to the strategy:
  • There is a premium-cost to set up the strategy
  • You risk missing out on profits that you could have made
  • on a stronger-than-expected slump in the market
agenda43

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Agenda
  • Intro
  • Pay-out profile & the four base positions
  • Basic directional strategies

1) Covered Call

2) Covered Put

3) Bull Call Spread

4) Bear Put Spread

  • Conclusions
slide44

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FX options – Plain Vanilla Strategies

agenda45

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Agenda
  • The concept of volatility
    • Historical volatility & implied volatility
    • Impact on option pricing
  • Plain vanilla volatility strategies:
    • Straddle
    • Strangle
slide46

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The concept of volatility

Price pattern B:

Price pattern A:

agenda47

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Agenda
  • The concept of volatility
    • Historical volatility & implied volatility
    • Impact on option pricing
  • Plain vanilla volatility strategies:
    • Straddle
    • Strangle
slide48

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Historical volatility & implied volatility

Historical volatility:

is an accurate description of past volatility

slide49

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Historical volatility & implied volatility

Historical volatility:

is an accurate description of past volatility

Implied Volatility:

is the markets view on how volatile an asset will be in the future

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How is volatility expressed?

Red line= implied volatility, EURUSD

Blue line = historical volatility EURUSD

slide51

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How is volatility expressed?

Red line= implied volatility, EURJPY

Blue line = implied volatility EURCHF

agenda52

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Agenda
  • The concept of volatility
    • Historical volatility & implied volatility
    • Impact on option pricing
  • Plain vanilla volatility strategies:
    • Straddle
    • Strangle
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Volatility - impact on option prices:

Price pattern B: EURJPY

Price pattern A: EURCHF

Strike prices of two call options

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Volatility - impact on option prices:

  • 2 CALL OPTIONS ON EURJPY:
  • IMPLIED OPTION
  • EXPIRY STRIKE VOLATILITY PRICE
  • 1) 1 month ATM 10% 1,88 pips
  • 2) 1 month ATM 35% 5,50 pips
agenda55

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Agenda
  • The concept of volatility
    • Historical volatility & implied volatility
    • Impact on option pricing
  • Plain vanilla volatility strategies
    • Straddle
    • Strangle
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1. Long Straddle

  • Scenario: you anticipate a large move in the spot, perhaps in connection with a certain event, but you are not sure about the direction.
  • You buy an ATM call
  • You buy an ATM put
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1. Long Straddle

Profitable range

Profitable range

Current price

Profit

Loss

Break even point

In a rising market

Break even point in

a falling market

A bought call

A bought put

New position:”Long Straddle”

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1. Long Straddle – conclusion:

  • Advantages to the strategy:
  • A non-directional strategy – a large move in the market in either
  • direction or an increase in volatility will make the strategy profitable
  • Downside to the strategy:
  • You have to pay two premiums, that can both potentially be lost
  • If you keep the position until expiry, and the market does not move
  • Losses can also be made on a fall in volatility
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2. Short Straddle

  • Scenario: you think the market will remain stable at the current level,
  • and / or that the volatility will fall
  • You sell a put with strike ATM
  • You sell a call with strike ATM
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2. Short Straddle

Profitable range

Profit

Loss

A

New position:

”Short Straddle”

Sold put with strike ATM

Sold call with strike ATM

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2. Short Straddle – conclusion:

  • Advantages to the strategy:
  • A non-directional strategy. Two premiums received up-front, that
  • you can keep, if the market doesn’t move. Can be profitable if
  • you correctly predict a fall in volatility
  • Downside to the strategy:
  • The risk is theoretically unlimited – large moves in either direction will cause losses – also an increase in implied volatility will cause the sold options to increase in value, thus creating a loss
agenda62

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Agenda
  • The concept of volatility
    • Historical volatility & implied volatility
    • Impact on option pricing
  • Plain vanilla volatility strategies:
    • Straddle
    • Strangle
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3. Long Strangle

Scenario: You anticipate a large move in the spot, perhaps in connection with a certain event, but you are not sure of the direction of the move.

- You buy an OTM call

- You buy an OTM put

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3. Long Strangle

Profitable range

Profitable range

Current price

Profit

Loss

Break even point

in a falling market

Break even point in

An increasing market

Bought call OTM

New position:”Long Straddle”

Bought put OTM

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3. Long Strangle – conclusion:

  • Advantages of the strategy:
  • A non-directional strategy
  • Very similar to the long straddle: a large move in the market or
  • an increase in volatility is needed for the strategy to be profitable
  • Downside to the strategy:
  • You have to pay two premiums, that can both potentially be lost
  • if the market does not move, and he keeps the position on till expiry
  • Losses can also be made on a fall in volatility
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4. Short Strangle

  • Scenario: you think the market will not move a lot, or that the volatility is overestimated, so you seize the opportunity to sell options:
  • - You sell an OTM call
  • You sell an OTM put
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4. Short Strangle

Profitable range

Profit

Loss

New position ”Short Strangle”

Sold OTM put

Sold OTM call

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4. Short Strangle – conclusion:

  • Advantages to the strategy:
  • A non-directional strategy. Two premiums received up-front, that
  • you can keep if the market doesn’t move too much
  • Can be profitable if you correctly predict a fall in volatility
  • Downside to the strategy:
  • Like with the short straddle, the risk is theoretically unlimited – large moves in either direction will cause losses – also an increase in implied volatility will cause the sold options to increase in value, thus creating a loss if the trader wishes to buy them back before expiry
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FX options – Basic Strategies

agenda70

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Agenda
  • Intro – why option strategies?
  • Pay-out profile & the four base positions
  • Basic directional strategies
  • Basic non-directional strategies
  • Basic hedging-strategies
  • Q & A
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why option strategies?

agenda72

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Agenda
  • Intro
  • Pay-out profile & the four basic positions
  • Basic directional strategies
  • Basic non-directional strategies
  • Basic hedging-strategies
  • Q & A
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Pay-out profile:

Price of the underlying at expiry, in this example EURUSD

Profit

Loss

1,51 1,52 1,53 1,54 1,55 1,56 1,57 1,58

Profit or loss of the

strategy at expiry

of the option(s)

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4 basic positions – “the building blocks”

Long call

Long put

Profit

Profit

Profit

Profit

Loss

Loss

Loss

Loss

Short call

Short put

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9. Protective Call

Scenario:You have a Short position in the spot. You believe that the market will move in favor of your position in the long term, but you are concerned that there will be a large correction over the next few weeks. You want to protect your position against the potential correction, but still maintain your open spot position.

- You are already short

- You buy an OTM call to protect your short spot, if the market rises

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9. Protective Call

Original position: short EURUSD

Lower profits compared to

the original position

Fear: EURUSD will increase in the short term

Lower risk compared

to the original position

A

Profit

Loss

Bought call with strike “A”

New position until expiry of bought call: a ”synthetic” put

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9. Protective Call - conclusion:

  • Advantages to the strategy:
  • The payment of a premium insures you against
  • temporary, adverse movements in the market
  • Downside to the strategy:
  • The option proves to be unnecessary if the market never
  • rallies as you feared
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10. Protective Put

  • Scenario:You have a long position in the spot. You believe that the market will move in favor of your position in the long term, but you are concerned that there will be a large correction over the next few weeks. You want to protect your position against the correction but still maintain your open spot position.
  • - You are already long
  • You buy an OTM put
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10. Protective Put

Original position: Long EURUSD

Bought put with strike ”A”

New position: ”synthetic call”

A

Profit

Loss

Fear: EURUSD falls short term

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10. Protective Put - conclusion:

  • Advantages to the strategy:
  • The payment of a premium insures you against temporary, adverse movements in the market
  • Downside to the strategy:
  • The option might prove to be unnecessary if the market never falls like you feared
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11. Collar on a long position

  • Scenario:You have a long position in the spot. You believe that the market will move in favor of your position in the long term, but you are concerned that there will be a large correction over the next period of time. You want to protect your position against the correction and, at the same time, reduce the cost of the hedge.
  • You are already long of the underlying
  • You sell a call with a higher strike (and receive a premium)
  • You use the received premium to buy a “protective put” at a lower strike
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11. Collar on a long positions

Original position: Long EURUSD

Sold call with strike ”B”

New position: Bull spread

Bought PUT with strike ”A”

A

Profit

Loss

B

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11. Collar on a long positions - conclusion

  • Advantages to the strategy:
  • The premium received from the sale of the OTM call finances (entirely or in part) the bought put
  • You know exactly what your maximum profit or loss is.
  • Downside to the strategy:
  • You miss out on profits that you would have made on a
  • stronger-than-expected rally
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12. Collar on a short position

  • Scenario:You have a short position in the spot. You believe that the market will move in favor of your position in the long term, but you are concerned that there will be a large correction over the next period of time. You want to protect your position against the correction while at the same time limit the cost of the hedge.
  • You are already short
  • You sell an OTM put
  • You use the premium that you receive to buy a “protective call”
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12. Collar on a short position

Original position: short EURUSD

Sold put with strike ”A”

New position: bear spread

Bought call with strike ”B”

Profit

Loss

B

A

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12. Collar on a short position - conclusion

  • Advantages to the strategy:
  • The premium received from the sale of the OTM put finances (entirely or in part) the bought call
  • You know exactly what your maximum profit or loss is.
  • Downside to the strategy:
  • You miss out on profits that you would have made on a
  • stronger-than-expected fall in the market